When Office Depot executives in 2007 realized the company would not meet a quarterly earnings estimate, they allegedly dropped hints to analysts and institutional investors in a series of one-on-one calls.
Those calls cost the company $1 million in a settlement announced today with the Securities and Exchange Commission, which charged Office Depot with violating fair disclosure regulations as well as unrelated accounting violations. CEO Stephen Odland and former CFO Patricia McKay will pay $50,000 each without admitting wrongdoing.
According to the complaint, which was filed in U.S. District Court for the Southern District of Florida, the company “did not directly tell the analysts that it would not meet their expectations; rather, this message was signaled through its references to recent public statements of comparable companies about the impact of the slowing economy on their earnings, and reminders of Office Depot’s prior cautionary public statements.”
The CEO and CFO allegedly orchestrated the campaign, although they did not make the calls.
After receiving the calls, the analysts promptly lowered their estimates for the period.
Six days after the calls began, Office Depot filed a Form 8-K publicly disclosing, among other things, that its earnings would be “negatively impacted due to continued soft economic conditions.”
The SEC charged Office Depot with violating Section 13(a) of the Exchange Act and Regulation FD. Also, the company allegedly inflated operating profit via premature recognition of vendor funds .
"Office Depot executives selectively shared information with analysts and the company's largest shareholders in order to manage earnings expectations," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This gave an unfair advantage to favored investors at the expense of other investors and, as today's action shows, is illegal."
Office Depot was represented by Daniel Shea of Hogan Lovells. John Sturc of Gibson, Dunn & Crutcher represented CEO Odland, and Charles Mills of K & L Gates represented McKay, the CFO.
The SEC's case was handled by Steven Meiner, Kathleen Strandell, Chad Alan Earnst, Eric Busto, Amie Berlin, Bob Levenson, Teresa Verges, and Yolanda Gonzalez.